October 3, 2022

Job Cuts And Pay Freezes – The Downward Spiral Continues

Companies by the thousands are announcing large layoffs to their labor forces and, in addition, cutting or freezing the pay of those who remain employed.

AT&T Freezes Salaries of 120,000 Management Workers

NEW YORK (Reuters) — AT&T Inc Chief Executive Randall Stephenson will forgo his 2008 bonus payment, and the company will freeze the salaries of 120,000 managerial employees this year, as the telecommunications company prepares for a grim year.

Stephenson’s decision, which he sent to employees in a memo on Friday, comes after the largest U.S. phone company said in December that it would cut 12,000 jobs, or 4% of its workforce.

As bad as the job cuts are, freezing and/or reducing pay for those still employed carries even more significance.   The last time large numbers of companies reduced workers’ pay  was during the depression of the 1930’s.

What type of demand destruction for their products or services are these companies forecasting that is forcing them to freeze or reduce pay?

US businesses are cutting costs drastically to survive as demand for their products evaporate.  The chilling irony is that lower incomes will further reduce demand, thereby creating a self perpetuating downward spiral. The United States and the global economy are in a vicious de leveraging that will take years to resolve.   Even a well conceived stimulus spending plan will do little to reverse the major trends working against economic growth.   Those forecasting a quick economic turnaround are likely to be disappointed.

Consumer Confidence Crushed As Upward Mobility Dies

No-Lay Off Policies Crumble, as reported by WSJ

Until recently, Enterprise Rent-A-Car Co. prided itself on a 51-year history of never laying off a U.S. employee. When competitors slashed fleets and shuttered branches after the Sept. 11 attacks, Enterprise kept hiring.

This fall, though, the nation’s largest car-rental agency said it would dismiss 1,000 of its 75,000 employees, as Americans curtailed driving and flying. “These types of declines are unprecedented,” says Patrick Farrell, Enterprise’s vice president of corporate responsibility.

The deepening recession is prompting layoffs at long-established employers that avoided job cuts in previous downturns. These layoffs demonstrate both the severity of the current recession and the continued erosion of workplace norms that once shielded many U.S. workers from permanent job loss.

Several of these employers are in hard-hit industries. Employment in the car rental and leasing sector, for example, fell 3.3% in October from a year earlier, according to the U.S. Bureau of Labor Statistics. Gentex Corp., a Zeeland, Mich., automotive supplier, conducted its first layoffs in 34 years this month amid plunging car sales. Declining gambling revenue prompted the Little River Casino in Manistee, Mich., to dismiss 100 of its 950 employees in November, the first layoffs in the resort’s nine-year history.

Waning Stigma

Some workplace experts say such layoffs show that the stigma associated with permanent job cuts — unthinkable to many employers three decades ago — continues to decline. They say companies find it easier to let go of workers when rivals and other employers also are eliminating jobs.

Kevin Hallock, a professor at Cornell University’s School of Industrial and Labor Relations, says as layoffs become more common, managers may find it easier to discount the human and business costs.

“It was a really difficult thing for them the first time,” he says. But “they got over that hump.”

Many of the employers conducting their first layoffs say they first tried other ways to cut costs, such as freezing salaries or drumming up work for idle employees.

This is not the type of post World War II recession the world has been accustomed to.  This recession, caused by a financial crisis, is distinctly unique in its global reach and appears to have no precedence.   To compare what is happening today to the Great Depression of the ’30’s is simplistic at best given today’s infinitely more complex global financial system.  The 30’s depression, as is the case today, was preceded by a booming highly leveraged economy  Beyond that similarity, there is little from the past which can guide us today.

Bernanke, a “student” of the Great Depression is finding out that his textbook solutions do not seem to be working.    The only certainty is that no one can say how long and how crippling the current economic downturn will become.  The speed of the collapse and the destruction of our conventional view of how things should work are causing the greatest harm of all –  the destruction of confidence caused by asset and job losses.

Assets

Loss of confidence works in many ways to confound whatever amount of fiscal stimulus the government undertakes.   Future financial action is predominantly rear view mirror based.   If stocks or housing have been great investments in the past, that view is extrapolated to infinity by most investors.   A rising market has many cheerleaders which reinforces the trend.

Confidence, once shattered by plummeting prices, needs many years to draw investors back into a broken asset class.   Having a job or a stimulus check is not enough to create the confidence to invest if you believe that you may not have a job tomorrow.

Jobs

Even more destructive to confidence is the abrogation of labor agreements once viewed as sacrosanct.

The greatest assault on our economic foundation is not the collapse of the banking system or investment banks on wall street.  The harshest economic reality of today is the realization that our long held belief in upward mobility has come to an end.   No longer can we assume that our children are entitled to earn more than us.   The American dream is becoming a nightmare as highlighted by pay and benefit reductions and job losses.  Job losses become the ultimate negative feedback loop.   Unemployed people do not spend.  Those with jobs are not confident that they will keep their jobs and spend frugally.

The number of companies announcing job cuts has so far been on a par with our last recession.  The number of companies announcing salary and benefits reductions is unprecedented.   Corporate America’s actions foretell a bleak economic assessment going forward.

It will take many years of economic improvement until the shattered confidence of both employees and employers is restored.   The upside of this downturn is that the urge by consumers to take ridiculous leveraged risks with borrowed funds will be curtailed.   Going forward, banks will price risk properly and the financial system will become sound again.   The hard part will be getting there.

Deflation Everywhere As Credit Unwinds

Motorola Tightens Belt Again – Wall Street Journal

Motorola Inc. announced most employees won’t get raises next year and put a freeze on its U.S. pension plan and matching 401(k) contributions as the struggling cellphone maker continues to cut costs.

The moves are on top of $800 million in cuts announced two months ago that include 3,000 job cuts and suspending breakup plans.

The telecom-equipment-maker said it will permanently freeze its U.S. pension plans, preserving vested benefits accrued by employees and retirees but eliminating future benefit accruals, effective March 1. The company said it intends to continue to provide funding to meet its pension obligations to present and future retirees. The 401(k) match suspension begins Jan. 1.

Messrs. Brown and Jha have agreed to have their 2009 base salary cut 25%. Mr. Brown also will forgo a 2008 cash bonus and Mr. Jha’s bonus will be cut by the amount Mr. Brown is forfeiting. The remainder will be taken in the form of restricted stock units.

We will be seeing many more headlines similar to this as the great credit unwind continues.  The panic moves by the Federal Reserve to lower credit costs and increase lending are at the margin as demand and spending continue to spiral lower.  Lower demand, lower incomes and asset destruction due to defaults are all deflationary.

Pay cuts, job losses and salary freezes are spreading throughout the economy with increasing speed and frequency.   As this self perpetuating cycle of lowered demand continues, lower interests rates may have only a marginally beneficial affect.  Employees receiving pink slips, pay cuts and lowered benefits are not likely to be spending more regardless of the level of interest rates.

The Federal Reserve is doing what it is supposed to do by stabilizing the economy, but they will not be able to change the economic fundamentals of a market economy that is attempting to correct past credit excesses.